Talking about accounting statements, there are three major types:
1. Income statement
2. Cash flow statement
3. Balance sheet
An income statement is a financial document that summarises the company’s revenues, expenses, and net income for a given period of time while the cash flow statement is a financial document that provides information on how cash flows through an organisation over a period of time.
Simply speaking, the balance sheet is a financial document that summarises all assets and liabilities of the company at a specific point in time. In this tutorial, we will focus on explaining what a balance sheet is in a very simple way, and give you some clear examples of how to use them correctly.
With the help of a Balance Sheet, a picture of what the company owns and owes, as well as its financial position can be shown. That’s why it is one of the three main financial statements that companies need to prepare. Usually four basic elements are included: assets, liabilities, shareholders’ equity, and net worth. As a result, investors understand the company’s financial position and make better decisions about buying or selling its stock.
Let’s take a look of the common balance sheet equation:
Total Assets = Total Liabilities + Total Equity
Pretty simple right? In order to help you fully understand what’s gonna happen, let me explain the terms one by one. In my teaching experience, many students confused about the term asset and liabilities. For example, “Is my property an asset? Or Liabilities? My parents told me the house we are living in is a liability but my friend told me the property is an asset!” So who tells a lie or both of them are correct? To answer this question, we first need to clarify the definition of an asset:
Assets are resources that can be used to generate economic value for the company or individual in the future. They are things such as cash on hand, physical property like buildings, inventory, intangible assets like patents or copyrights.
